As a federal country, one of Canada’s hallmarks is a well-developed system of intergovernmental transfers. Indeed, we often remark that Canadian provinces are dependent on federal transfers for large chunks of their spending and there is some debate over whether Canada’s provinces should engage in more own-source revenue effort rather than plead for more transfers. Imagine then my surprise when a comparison with U.S. state governments reveals that Canadian provinces are not as transfer dependent for their revenues as are many U.S. states.
The three main Canadian federal transfer programs to the provinces are the Canada Health Transfer (which funds provincial public health care systems), the Canada Social Transfer (which funds provincial social welfare and post-secondary education), and Equalization (which is designed to allow less prosperous provinces to provide public services that are reasonably comparable to other provinces.) Then there is the Territorial Formula Financing, which funds the governments of the three territories. Federal transfers currently make up approximately 20 percent of provincial-territorial revenues.
Interestingly enough, according to 2012 state government finance data from the U.S. Census Bureau, federal transfers to state governments in the United States make up about 27 percent of their total revenue. As well, much of the recent growth has been for income security programs as well as Medicaid – which is funded by the Federal and state governments but managed by the states. Moreover, the Canadian federal system of provincial-territorial transfers is relatively simple compared to the diverse and pluralistic set of programs available to state governments in the United States. There are literally hundreds of federal aid programs for U.S. states in areas such as education, housing, health care and transportation as well as many other programs also for local governments. This suggests that there must a higher level of bureaucracy and administration when it comes to intergovernmental transfers in the United States relative to the Canadian system.
So, how do the provinces and states stack up in terms of transfer dependence? Well, the accompanying figure (Figure 1) ranks the provinces and states together by the federal transfer share of their total revenue. This ranking is for provincial and state finances – the local sector is excluded. The Canadian data is for the 2012-13 fiscal year and from the 2013 Federal Fiscal Reference Tables. The U.S. data is for 2012 and from the U.S. Census Bureau, State Government Finances.
The results? No U.S. state gets less than 15 percent of its total revenues from federal transfers whereas three Canadian provinces – almost a third – are in that category in Canada. Six Canadian provinces are in the bottom 25 percent of the distribution – Quebec and Ontario as well as British Columbia, Saskatchewan, Newfoundland and Labrador, and Alberta. Indeed, Alberta is the least federal transfer dependent of all 60 of these jurisdictions. Manitoba is in the middle of this continental pack while Nova Scotia, New Brunswick and Prince Edward Island are at the top. When it comes to federal transfer dependency - at least as a share of total revenues - PEI and New Brunswick are comparable to Louisiana and Mississippi – which are the most transfer dependent of these 60 jurisdictions.
However, Canadian provinces generally have much higher per capita revenues than U.S. states as illustrated in Figure 2. Thus another interesting comparison is to look at the per capita value of federal transfers across these jurisdictions as shown in Figure 3. Given that the Canadian dollar was essentially at par with the US dollar in 2012, the Canadian numbers in Figures 2 and 3 can all be interpreted as in US dollars. As Figure 3 shows, Prince Edward Island and New Brunswick are the biggest federal transfer recipients in per capita terms across these 60 jurisdictions. They are then followed by Alaska and Wyoming, and then Nova Scotia and New Brunswick. Quebec, Newfoundland and Ontario are approximately in the middle of the pack while the three remaining western provinces are then near the end. Thus, it would appear that relative to their U.S. state counterparts, Canadian provinces are less transfer dependent if necessary but not necessarily always receiving less transfers.